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Entry dates in "new" controlled group situation


MarZDoates

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Company B became a wholly owned subsidiary of Company A due to an acquisition effective 4/1/16.  Company B did not maintain a plan.  Company B will adopt Company A’s plan; however, they want to implement coverage transitional rule.  This means that the plan does not have to cover Company B’s employees until 7/1/17 correct?  Plan does not count years of service for eligibility with Company B prior to the acquisition date.

The plan has 6/30 fiscal year end:

Eligibility for deferrals age: 21/1 yos:  7/1 and 1/1 entry dates.

Eligibility for profit sharing:  21/1 yos:  One entry date:  7/1  (Retroactive to first day of plan year preceding date ee meets eligibility).

If Company B adopts the plan effective 7/1/17, when will their employees be eligible to enter?  One would think 7/1/17 for the deferrals, but what about the profit sharing?  The retroactive entry date is skewing my thinking. 

By what date must the participation agreement be adopted?

Thank you.

QPA, QKA

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Transition rules allow coverage to be determined separately as long as the plans don't amend eligibility or benefits, so yes, 7/1/2017. Participation agreement for B should have been adopted by 7/1/2017 for 7/1/2017 effective date if B wanted its employees to be able to defer as of that date, otherwise they can't defer until it's signed as B still has no plan until then.

PS for B should not be effective until 7/1/17-6/30/18 PY, the retro entry doesn't apply for the 4/2016-4/2017 YOS and a 7/1/2016 entry as B's employees were not eligible then. 

Remember, these are two different situations here: (1) B's required inclusion for control group coverage and nondiscrimination, and (2) B's adoption of A's plan as a participating employer. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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54 minutes ago, MarZDoates said:

Plan does not count years of service for eligibility with Company B prior to the acquisition date.

I have a problem with what I think OP is saying re eligibility - that is, OP is saying that for eligibility purposes in A's plan, service with B prior to the acquisition is disregarded.

I disagree with this. For eligibility purposes, service with any member of the Controlled group must be counted.  See DOL regulation 2530.210(d).

I know there are some people who interpret the Treasury regulation (dealing with vesting service) 1.411(a)-(b)(3)(iv)(B) to mean that you don't have to credit the service with B prior to the effective date of CG status, but I don't agree, and there are luminaries such as Derrin Watson, for example, who agree with me. Or more accurately, I agree with them, because they have no need of hearing my opinion!

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While I agree that all of B's service must be recognized that doesn't necessarily mean that the transition period is effectively eliminated. The transition period runs through 6/30/2017 and as long as the provisions of A's plan don't specifically throw away the transition period, employees of B can be ignored for 410(b) purposes through 6/30/2017, notwithstanding the fact that as of 7/1/2017 an employee of B would be able to take advantage of all service with B.

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53 minutes ago, CuseFan said:

...they can't defer until it's signed as B still has no plan until then.

Have I missed something?  Isn't there a need to inspect plan A to determine whether B employees are eligible automatically?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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  • 2 weeks later...

Derrin Watson could be correct, he usually is, but every plan I've drafted for going on 30 years has stated that you count eligibility service only for the period during which the controlled group exists. Of course, if you merge plans, then you have to count all service, but if you don't, I don't think you have to. Belgarath, I think your DOL reg cite is ambiguous, because it just says that you have to count all service with members of the controlled group. Well, before the acquisition, the company that joined the controlled group was not a controlled group member, so maybe you don't need to count the service. On the other hand, it is now, so maybe the reg is saying you do have to count. The DOL reg doesn't say one way or the other. The IRS cite is jumbled, so I could not find. Of course, most companies amend their plans as part of the acquisition to give the service, so it does not come up all that often in practice.

In any event, clearly, the plan does not have to consider the Company B employees for 410(b) until 7/1/2017. Effective 7/1/2017, when B adopts the plan, if you don't amend it otherwise, you start applying the plan's one year of service/age 21 eligibility requirement and the B employees get in, or not. Those who were employed by B on 4/1/2016 and who are still around have a year of service by 7/1/2017, so they all get in on 4/1/2017. They will also get profit sharing for the 7/1/2017-6/30/2018 period based on the plan's provisions.

 

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Hi Luke - not surprised you couldn't find it - it isn't easy typing with 10 thumbs - particularly when 7 of them are on one hand! Let me try again - 1.411(a)-5(b)(3)(iv)(B).

Anyway, I've found that once people have formed an opinion on this subject, one way or the other, they rarely change. I also can't say that I've ever seen or heard of an auditor ever questioning this one way or the other...

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Thanks, Belgarath. I looked at the reg you cite. As I think you implied yesterday, the IRS is clearly saying in 1.411(a)-5(b)(3)(iv)(B) that for vesting purposes you only have to count service for the period during which the controlled group exists. It is of course arguable whether this can be extrapolated from vesting to eligibility. As I noted yesterday, it seems to me the DOL reg is ambiguous. I will stick for the moment with my view that plans are probably only required to give credit for service with controlled group members for the period during which the controlled group exists, for both eligibility and vesting. Again, this is not the case if you merge the plan of an acquired group member into the acquirer's plan, because there the regs require (under 414(l) if I recall correctly) that you credit the employees with all service they had under either merged plan. Surprised this is not settled by some definitive regulation, but apparently not.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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